An expensive lesson in globalisation

Iceland: Yes, it’s that cold place where Björk’s from – but more recently, the country has become famous for the sudden collapse of its banks and being, as our most famous export once sang, in ‘a state of emergency’.

Is there any hope left for Iceland?

The situation has got everyone scratching their heads with a look of disbelief. How, Icelanders ask, could this happen to an independent democracy? Having gone from being one of the poorest nations in Europe when they gained independence in 1944, to one of the richest, people are utterly confused by the situation.

A nation with a bigger ego than population worked their woolly socks off to prove just how much it could achieve. On the way, it became one of the richest countries in Europe. In recent years Iceland has seen more money coming in than ever before, owing to the rapidly expanding financial sector, leading to a thriving economy and inevitable consumer frenzy. Perhaps, cynics say, it’s time for a reality check.

‘Having gone from being one of the poorest nations in Europe in 1944, to being one of the richest, people are utterly confused by the situation.’

Now, everything has come to a standstill. International money transfers have been halted for weeks now and many living overseas who were paid in kronas have been left stranded. Icelandic students studying abroad cannot get their loans and some are having to pack up and go home as they can’t afford even the basics. One student living in Belfast on 60 Euros had no idea how much she’ll receive from the Government loans body, or indeed, when she’ll receive it. Iceland’s biggest export, seafood, (a third goes to the UK) cannot be paid for. In a population of 320,000, a massive 7,000 jobs are expected to go in the next weeks and months. Tens of thousands have lost their savings. Loans, linked with 15.7% inflation, are soaring. And as the bitter winter closes in on Iceland early this year, it seems like everywhere you turn, people are stranded, lost, and desperate.

Blame for the crisis has been placed on external financing, privatisation of the banking sector, wholesale funding, and a new generation of Icelandic entrepreneurs and investors who snapped up a nice proportion of the British high street. All this led to the total assets of the three main banks in Iceland reaching more than ten times the country’s GDP, leaving the Bank of Iceland no chance in defending or supporting its financial sector. How could the government and the Financial Supervisory of Iceland allow the banks to become this big within Iceland? And why weren’t the banks set up so that the responsibility for their actions would lie within the countries in which they were trading? These are the questions now burning on Icelanders’ tongues.

Other queries being raised concern the whereabouts of these Icelandic investors and entrepreneurs. Companies such as Icelandair (a commercial airline) had saved hundreds of millions of pounds to safeguard against such a financial crisis before being taken over, but they have since been caught off guard in the realisation that the money has been spent. People who thought their interests were being looked after have invested their pensions in shares of the supposedly safe banking industry, only to be left with nothing.

Photo: Lukka Sigurdardottir (www.indefence.is)

Many Icelanders feel as though they’ve been hoodwinked into believing that company shares, close to 100% loans and high interest rates were full-proof. The money glacier has melted and Iceland is swimming in a sea of foreign debt.

Offering higher interest rates than British counterparts, the controversial Ice Save Funds have attracted a great number of British investors – including local councils, charities and universities – all of whom have been affected and have no idea when, if at all, they will be seeing the money.

Icelandic Finance Minister, Árni Mathiesen, apparently stated that the Icelandic government would “not stand by their commitments,” and in response, Alistair Darling controversially attempted to stop UK savers from losing their money: UK assets were seized and Icelandic bank Landsbanki found itself on the UK terrorist list – a list that includes Al-Qaeda.

In fact, Mathiesen did not make any such statement, as he apparently insisted that Iceland would indeed be standing by their commitments. This has since put Darling in a tight spot as many have raised concerns about British anti-terrorist laws being banded-about so freely. It has even been claimed that had the British government kept its nose out of the crisis, the banks (or at least the largest – Kaupthing) would not have collapsed at all.

Were Gordon Brown and Alistair Darling simply trying to do the right thing, or were they playing a much bigger political game? Some reports have suggested that other foreign banks might cause a much bigger problem and that is why they’ve taken such a tough stand and made an example of Iceland.

The British government now plans on suing the Icelandic nation, and many Icelanders are angry at being labeled as terrorists and are calling for their government to sue Britain back. In their bid for popularity, Brown and Darling may have made a big mistake. If the Cod Wars were anything to go by, bullying a small nation simply doesn’t work out in the long run.

Many may expect the terrorist-tag issue to just blow over – Darling has kept quiet about what was really said by Mathieson, and the British Government has placed Landsbanki into a special, new non-terrorist category. Icelanders, however, are profoundly aggrieved. A new campaign – www.indefence.is – has been set up, where hundreds have signed a petition and sent in pictures with statements like, ‘I know I’m beautiful, but that doesn’t make me a terrorist’. Britons have even got in on the act, with ‘British and ashamed of Gordon Brown’. It certainly feels personal.

The first step to recovering the economy has been taken, with Iceland asking the International Monetary Fund (IMF) for help. It is unclear whether the demands from the British government will be part of the negotiations, but the IMF has agreed to lend Iceland a third of what is needed to get their economy and international trade going again. For the other two-thirds, the Icelandic government is appealing to fellow Nordic nations and is in talks with Russia. For now, it’s a waiting game.

At best, the world may be learning a lesson; at worst it will follow the same pattern as before. For now, all Icelanders can do is to hope they’ll survive this awful, cold winter. A state of emergency is certainly not a position any of us want to be in. There are long dark days ahead.